- Both the standard deduction and the itemized deduction
reduces the amount of tax that you pay in a given year,
but which one is better?
I'm going to be answering that question in this video.
(ethereal music)
Hey guys, welcome back to The College Investor,
the place for investing
and personal finance for millennials.
Today we are partnering with Credit Karma in this video
and we're going to be talking about
which situation makes sense for you
to take the standard deduction or the itemized deduction
and the difference between the two.
Be sure to check out our complete review
of Credit Karma's new tax software.
And first, let's go ahead and jump into
what is the standard deduction.
A standard deduction reduces the amount of tax
that you owe in a given tax year.
The standard deduction for the 2019 tax year
was $12,200 for singles,
$18,350 for head of household,
$12,200 for married filing separately,
and $24,400 for married filing jointly.
For example, a single person who earned $50,000
in 2019 has a $12,200 standard deduction.
So they actually only pay taxes on $37,800,
so that's the 50K minus $12,200.
So that reduces the amount of taxes that they pay into
because they took that standard deduction.
And remember, you always wanna reduce the amount of income
that is taxed upon because the smaller the amount of income,
the smaller amount of taxes
that you're actually having to pay into.
No matter how much or little you earn in a given year,
you can take the standard deduction.
Now, the standard deduction is standard for a reason.
Most people won't be able to find enough expenses
that covers more than that $12,200 standard deduction.
Now, the few people who can itemize
instead of taking the standard deduction
are typically people who have high charitable contributions
or live in counties that have
high property and income taxes.
So what does it mean to itemize taxes?
When you itemize taxes,
you are taking valid personal expenses, adding those up,
and if those expenses exceed your standard deduction,
then that's when it would make sense to itemize your taxes.
So when you claim a larger deduction,
you're going to pay less in taxes.
And if you end up having more in itemized deductions,
then that's obviously when it would make sense.
So there are a couple of different ways
that you can itemize your expenses
including charitable contributions,
mortgage interest up to $750,000 of your mortgage,
state and local income taxes or sales tax, property taxes,
and medical expenses worth more than 10% of your income.
Now, if you don't know if you have more itemizations
than your standard deduction,
that's where your tax software
is going to walk you through both options.
You're going to input all of your information
and then it's going to tell you
here's your standard deduction option
and how much taxes you could potentially owe
and here's your itemized deduction
and here's how much in taxes you could potentially owe.
So Credit Karma does exactly that.
They walk you through each option
and then you get to make that choice
based upon your own tax filing situation.
Now, there are other ways you
can reduce the amount of taxes that you owe
and that includes contributions
to a workplace retirement plan,
like a 401(k) or a traditional IRA,
business expenses through a Schedule C,
contributions to a Health Savings Account,
educator expenses, student loan interest, and paid alimony.
It can be hard to try to determine this on your own
whether or not you should take the itemized deduction
or the standard deduction.
In general, most people are going
to take the standard deduction,
but your tax software is really going to help you out
in making that decision so that you can be crystal clear
that you were paying in the least amount of taxes.
Credit Karma Tax software is an awesome software
because it's 100% free
and we've really found this tax software
to be very robust, easy to understand.
The dashboard is very easy to use,
and did I mentioned it's free?
You can be sure to check out our complete review
of the Credit Karma Tax software
by visiting us at thecollegeinvestor.com.